What Is a Target Company?

The so-called target company refers to a party whose shares or assets have been absorbed or acquired as a result of a merger in a merger or acquisition. It is relative to the merged company. The selection of the target company is critical to the success of the corporate restructuring, so it is necessary to properly screen the appropriate target company.

target company

The so-called target company refers to

Target company

Selection of target companies under different M & A motivations [2]

In addition to the commonality of the target company's choice, it presents different requirements under specific merger and acquisition motivations and merger and acquisition methods. The following outlines the choice of target companies under various typical motivational approaches.

(I) Selection of target companies under the motivation of scale expansion

1. The scientific meaning of economies of scale.

Different schools have different views on the interpretation of economies of scale, but the core meaning is that the proportion of increase in output exceeds the proportion of increase in inputs. The economy of scale includes two levels: one is the scale economy at the factory level, which refers to the reduction in unit product costs caused by the expansion of equipment and the specialization of labor and collaboration; the second is the economy at the enterprise level, which is in terms of shared management, capital, supply and marketing, etc. Economies of scale achieved by resources. Scale does not necessarily mean economies of scale. Scale expansion does not necessarily accompany economies of scale in which revenues increase. Scale expansion is limited. Economies of scale occur at the stage of increasing scale.

2.Selection of target companies for horizontal mergers and acquisitions

The economy of scale in horizontal mergers and acquisitions refers to the use of large and efficient equipment to increase output, reduce unit costs and reduce unit investment.

The selection of target companies for horizontal mergers and acquisitions can mainly be considered from the following factors: (1) National policies and legal regulations. From the economic point of view, the state has legally limited the size of the target company selected by the main merger and acquisition company to avoid the uneconomical of small mergers and acquisitions. The choice of target enterprises should be considered in accordance with national industrial policies and regulations for the transfer of state-owned equity. (2) Industry requirements. When choosing an industry, you should consider: First, the industry is in a growth stage and a mature period, and there is still a lot of room for development in the future, so that enterprises can sustain their returns to scale. Second, choose companies with significant industry scale effects. Scale expansion can translate into cost savings. Third, there is a gap between the current scale of the industry and the optimal scale, and the expansion of enterprises is still at a significant stage of economies of scale. Fourth, there is sufficient market demand. The premise of scale economy is the increase of inputs and the expansion of output scale. The manifestation of scale economy must be based on the acceptance of the market. (3) The current size, financial and management status of the target company. The sum of the main and the target companies cannot exceed the industry's optimal scale, but it is better to achieve the minimum scale, which can not only achieve the scale effect, but also try to overcome the difficulties brought by expansion to the management. Too large or too small does not mean economies of scale. Economies of scale are optimal only in a certain region. The purpose of mergers and acquisitions is to use some of the company's remaining resources. (4) The feasibility and complementarity of the resources of the target company and the company. The main company and the company choose the target company to make decisions based on their own advantages, ease of resource transfer, and complementary resources. (II) Target company selection under the motivation of vertical integration

Vertical mergers and acquisitions emphasize savings in management costs, reductions in transportation costs, and time and materials in intermediate links to avoid waste and loss of resources. For corporate mergers and acquisitions that operate the same product but are in different operating stages, there are forward and backward mergers and acquisitions. Forward M & A in vertical mergers and acquisitions reduces the pressure on buyers and brings buyers into the enterprise. Vertical mergers and acquisitions can improve the timely supply and technical reliability of raw materials and other production inputs, especially when the number of enterprise input suppliers is small, and the competition for inputs is fierce and the prices of inputs are strong. The uptrend is even more pronounced.

The selection of the target company for vertical mergers and acquisitions mainly considers the following factors: (1) Industry and strength requirements of the main merger enterprise. The vertical M & A industry chooses industries that tend to grow or have relatively stable market demand for the production of final consumer goods. There are characteristics of technological complementarity and continuous production between the main and parallel enterprises and the target enterprise. For example, the steel industry integrates steelmaking and rolling, which can effectively save transportation, heating and construction investment. Looking at the development of world mergers and acquisitions, vertical mergers and acquisitions occur after horizontal mergers or enterprise scale development. Therefore, vertical mergers and acquisitions are considered only after the main merger enterprise develops and occupies an advantage in its own field. Vertical mergers and acquisitions are conditional on the strong competitiveness of the main merger. (2) Organizational management level and production technology requirements of the target company. Selecting a target company that tends to be in a higher position in the industry, with strong production capacity and complete facilities, the owner and the company do not need large investment and bear great risks to adjust the production organization of the target company. (3) Coordination of the scale of the target company and the main company. The main company must either use the target company as a supplier of production factors or use the target company as a user of its own products. Therefore, there is a problem of coordination between the main company and the target company. The target company's production scale should be matched with the main company's scale as a principle, but it cannot be matched with the main company's production scale and the target company's original production scale must be reduced. Each link should reflect the corresponding economies of scale. For companies larger than the size of the company, they can be sold to the market. This incomplete integration sometimes reflects the market's incentives and obtains external relevant information. The vertical integration should reflect the savings brought by the concentration of transportation costs and construction investment. Consider the location of the target company and the coordination of the main and the enterprise. The market capacity of the final product in vertical mergers and acquisitions limits the scale of production. Regardless of vertical mergers and acquisitions, scale and market coordination must be considered. (3) Selection of target companies for mergers and acquisitions motivated by diversification

1. Explanation of diversification. The corporate diversification strategy is relatively specialized. There are two ways for a company to diversify. One is related diversification. Although the newly developed business of a company has new characteristics, it has strategic adaptability to the original business of the enterprise. The market and technology are related to the acquirer and can cooperate with each other, but they are not completely interdependent. The other is non-relevant diversification, which means that the newly developed business of an enterprise is not directly related to its original business in terms of technology, resources, knowledge, etc., and it is purely to find new economic growth points and profit points for making full use of free cash flow investments. Such mergers and acquisitions are more risky and are caused by being unfamiliar with the industry in which the target company is located.

2. Target company selection

The main merger and acquisition company's choice for diversification should be limited growth in its industry, or continue to develop higher growth costs in this industry before turning to other industries.

Principles of industry selection: (1) The new business areas that enterprises enter should have considerable industrial attractiveness. We should not blindly enter those "sunset industries" but should enter those "sunrise industries" with development potential and development prospects. (2) It must have a good correlation with the company's existing main business and core competitiveness. Selection points: First, industry selection. Generally speaking, an enterprise should first select those areas that are closely related to its main business and easily obtain related advantages as the main entry targets for diversification. This association includes tangible, intangible, and competitor associations from Porter's perspective. Second, choose industries with weak correlations with cash flows and weak product substitution. It is best that the products of the main and the enterprise are strongly complementary to the products of the target enterprise. Second, measure the strength of the company. Diversification means that companies have to enter new fields.Because of lack of sufficient knowledge, information and corresponding expertise in new fields, the risk of entry is often high, and at least they must bear higher risks than in the main business field that they are familiar with, plus It is impossible for companies to obtain high returns quickly in new business areas to balance the high risks in new areas. Therefore, at the beginning of diversified business, stable protection and strong strength support are particularly needed. Due to the high degree of decentralization of business areas and the different management models in different areas, this puts forward higher requirements for the managers of enterprises. Third: the internal management of the target company. There are several problems in the diversified operation of the main merger company: (1) The information needed for decision making in the main merger company is oriented to the existing industry and cannot provide a lot of information required by the new industry. (2) Master and company technology should be targeted at the original industry, and it is often unable to adapt to or withstand emerging industries. Especially for the decision-making method in which the product mix is determined by market demand and then the technical structure is determined, the technology of the main and the company is lagging. (3) The resources of the main merger company are mainly applicable to the original industry. The different nature of the resources of the emerging industry and the original industry makes the original resource allocation and resource sources of the main merger company unable to be used. In combination with the above problems, the target company is required to choose to make up for this deficiency. The target company should have its own complete information system, the ability to independently collect the industry's prospects, market demand and forecast capabilities, and possess a high level of industry-specific management capabilities and technical personnel. Fourth: detailed cost-benefit analysis of new industry involvement. The cost-benefit analysis includes two parts: one is a comparative analysis of the benefits and costs of entering a new industry to determine the feasibility of hybrid mergers and acquisitions; and the other is a cost-to-benefit analysis of enterprises' continued expansion of existing industries. Comparing the two methods, the more profitable scheme is more feasible, but the analysis of risk and sensitivity to the new industry must not be ignored in the analysis.

(4) Selection of target companies motivated by buying a shell

In China's mergers and acquisitions, the proportion of shell listing as a motive for mergers and acquisitions is relatively large, with profound social reasons, and it has practical significance at this stage.

1. Interpretation of buying a shell.

The concept of buying a shell in China started as the earliest Chinese-funded company bought a shell from overseas (mainly Hong Kong), and then in the domestic securities market, there have been increasing cases of non-listed companies acquiring shares of listed companies through mergers and acquisitions. "The so-called shell listing refers to a non-listed company acquiring a listed company through agreement or a secondary market acquisition method in accordance with national regulations and stock listing trading rules, and then obtaining a controlling stake; then the personnel, assets, business, etc. of the listed company Restructuring, injecting high-quality assets and businesses into listed companies, and achieving indirect listing of their own assets and businesses. Therefore, a typical shell purchase listing actually includes two transaction components: one is a shell purchase transaction, and an unlisted company passes the secondary The market or internal agreement transfer method to obtain the controlling right of a listed company; the second is an asset transfer transaction, that is, a listed company reversely acquires some assets of an unlisted company. Generally, it should have high-quality assets with development potential and strong profitability, that is, unlisted The company injects its relevant business and assets into this shell. "

2. Select the target company to buy a listing.

Shell buyers should conduct detailed analysis and evaluation from their economic strength, the development prospects of their industries, the company's development strategy, and opportunities and challenges in development, to determine the shell buying methods and acquisition standards that shell buyers should adopt .

(1) The main company has high-quality assets. The buyer should have real high-quality assets, and its development industry belongs to the sunrise industry. The injection of high-growth operating business into the shell company can significantly improve and enhance the operating performance of listed companies in order to raise funds in the future. Secondly, the shell buyer should have sufficient cash to pay the purchase price and shell company operations.

(2) Qualifications of the target company for listing. Listed companies that are the object of shell buying are often those with poor performance and hollowed-out interiors. Apart from their qualifications for listing, other aspects of the company are not attractive to shell buyers. Choosing a listed company or qualified asset injection that is qualified for rights issue and additional issue of new shares can quickly increase the return on net assets to meet the requirements for the return on equity.

(3) Industry status of the target company. The choice of industry status depends on the motivation of the main merger company. If the acquirer only uses shell resources to obtain financing, the industry to which the target company belongs is usually a sunset industry, and the industry development prospects are not good. There is no need and possibility to continue development in the industry. Much of the current M & A incidents in China that buy shells are this kind of. If the acquirer not only uses shell resources but also achieves the purpose of scale expansion, the main merger company chooses a target company that is the same or similar to its industry.

(4) Features of equity. Buying a shell listing requires a controlling stake in a listed company. Choosing a listed company with a small total share capital and tradable share capital enables the acquirer to obtain the controlling interest in the target company at a lower cost. The total share capital of the shell company is small, generally between 50 million and 150 million shares. It should also be noted when selecting carefully: Firstly, the share capital structure is single, and listed companies without state shares, non-personal shares and no foreign shares should be preferred. This type of three non-sectors is a typical shell buying object. The second is listed companies that have an absolute advantage in the proportion of tradable shares or that have relatively dispersed state equity.

(5) The operating status of the target company. For the purpose of shell purchase only, the main merger company selects those shell companies that have sustained losses or have shown signs of losses and marginal profits, and have lost their ability to turn losses on their own capabilities and re-qualify for rights distribution.

(6) Price analysis of shell resources. The price of shell is an important factor in the choice of the company. The value of the shell company is related to the size of the share capital, the degree of equity dispersion, the number of shares purchased and the current supply and demand of shell resources.

(5) Selection of target companies with the motivation of outward expansion of intangible assets

Horizontal mergers, vertical mergers, and diversified mergers and acquisitions all involve the outward expansion of intangible assets. The expansion of intangible assets is a concrete manifestation of the above-mentioned motivation for mergers and acquisitions. The synergy effect of intangible assets brings greater efficiency and benefits than conventional rectification. However, the expansion of intangible assets is not unconditional, and requires the target company to have the ability to support the intangible assets or the related business fields. If the expansion of intangible assets is done blindly regardless of these conditions, not only will there be no synergistic effect, it will even damage the original value of the intangible assets.

Therefore, enterprises should consider the following aspects in selecting the target of mergers and acquisitions: (1) Understanding of the economic strength and economic environment of the main merger company. (2) The degree of synergy between the target company and the main company. When choosing a target company, due consideration should be given to the differences in regional culture. Cultural synergy or conflict directly affects corporate operation synergy and M & A performance. (3) Industry relevance. The infiltration of the advantages of intangible assets should be dominated by enterprises in the same industry and adjacent industries. That is, mainly horizontal mergers and related hybrid mergers and acquisitions. (4) The target company's ability to support intangible assets. Intangible assets work in combination with tangible assets, which involves a problem, that is, the ability of the target company's tangible assets to support intangible assets. (6) Selection of target companies motivated by speculative purposes

For speculation-based mergers and acquisitions, the main merger and acquisition company is to find a target enterprise whose value is underestimated due to poor management, poor efficiency and other reasons. After the merger and acquisition, the acquiree is reorganized and packaged, and then sold again at a higher price to obtain the spread income. Or the main merger enterprise can use the self-expanding effect and tax effect of the earnings per share generated by the merger and acquisition.

1. The method of selecting target companies with underestimated value.

The economist Tobin proposed a famous coefficient in 1969-the Tobin coefficient. Tobin's coefficient; the market value of the company / the replacement cost of the company's assets. Tobin and others have found through research that there may be a considerable gap between the market value of an enterprise and the current replacement cost of its assets. If the former is less than the latter, that is, the Tobin coefficient is less than 1, it is cheaper to acquire control of its assets by acquiring the company's stock than to rebuild the same assets in the market. Obviously, the lower the Tobin's coefficient of an enterprise is, the more it has the value of mergers and acquisitions, which may indicate that the enterprise is undervalued. If the main company's Tobin coefficient is high and the target company's Tobin coefficient is low, a large merger benefit may be generated.

2. Get the self-expanding effect of earnings per share. Choose if the merger and acquisition is carried out by way of share swap, the share price of the main merged company is higher than that of the target company, and the total number of shares after the merger is less than the total number of shares of the two companies before the merger, even if the two companies did not produce a synergy effect Fang's earnings per share will rise as the number of shares decreases. After the merger, people always expect to have a synergy effect. The good performance of the main merger company will drive the target company to develop synchronously. Therefore, the price-earnings ratio is higher than the target company. The main merger company can take advantage of this EPS self-expansion effect, and acquire those companies with low price-earnings ratios and high earnings per share as transaction targets, thereby raising the entire enterprise stock price. In the short term, companies can earn the difference from selling shares.

3. Get tax revenue. The tax law provides for deferred loss clauses and tax rates for various regions and industries. For the merger and acquisition company can choose to acquire loss-making enterprises in order to reduce the main merger and acquisition company's book profit and pay less income tax purposes. However, the reason for the loss of the loss-making company should be based on the fact that the main company can improve the loss situation of the target company, otherwise the short-term income tax incentives cannot make up for the reality of the target company's long-term losses. There is no such requirement if the main purpose of the merger is to use one of its assets or shell resources. When the main merger company intends to conduct cross-regional or cross-industry mergers and acquisitions, in addition to the aforementioned selection points of horizontal mergers or vertical mergers and acquisitions, it is also necessary to consider the differences in tax rates of different industries and regions. Under the same conditions, such enterprises with preferential tax policies are preferentially selected, and this tax advantage is fully utilized through the internal adjustment of the main and the company.